Biotech Boom Lifting All Boats

The following is a 3 year chart of the iShares Biotech ETF IBB. The 200-day (blue) and 100-day (red) simple moving averages are also shown to give a sense of the strong momentum and up-move there has been. The so called 'animal spirits' are back.

Returns on the ETF have been pretty spectacular 65% in 2013 and 32% 2012. There is a boom going on in biotech stocks that is lifting all boats.

Below shows some valuation metrics in this ETF. They are not shockingly high, especially for biotech's that are seen as growth stocks, although it should be noted they are forward looking an there rely on predictions of future earning etc.

If we take a look in the Swedish markets there have been some huge moves the past year in healthcare related stocks

Orexo 206%
Sectra 65%
Allenex 175%
ELOS 109%
Oasmia Pharmaceuticals 101%
Vitrolife 128%
Swedish Orphan Biovitrium 95%

Even large cap stock AstraZeneca is moving up with big returns of 35% the past year and 20% in just the past 3 months! It is now trading at a P/E 17 and P/FCF 33, this is a generous valuation for a company that has had falling revenues and net profit the past years. Some of its drugs will be coming off patent so further reductions are expected in the coming years.  Growth however is expected to return earlier than previously thought with sales in 2017 matching 2013 here. Clearly the market is much more willing these days to believe and price in positive future scenarios.

Biotech stocks are popular with private investors (or should I say speculators) because of their big moves, however understanding these types of stocks and valuing them is very tricky. Future cash flows depend on the success and predicted sales of a multitude of projects and potential drugs in the pipeline. One negative announcement or a clinical trial failure can crush a stock price.

You either have to be a very good analyst or diversify over many stocks or have very strict money management trading rules such as stop losses. Take for example, Active Biotech. Its stock price fell 50% when CHMP (Committee for Medical Products for Human Use) surprised investors when they recommended a refusal to market Nerventra (Laquinimod) for the treatment of multiple sclerosis. The sales of this drug have now been completely discounted from the share price here.